Projected revenues look good, location suits, the business activity is exactly what you are looking for and it is a good time to buy.

 Obviously there is going to be a risk with any business you purchase, but for a successful business take over  consider  our following top 10 Due Diligence Tips.

  1. Do an extensive ASIC and credit search on the company and its directors. 
  2. Obtain the last four years of financial statements for the business and look for a breakdown of all assets and liabilities including loans, leases, inventory, accounts receivable and accounts payable. Many small business do not fully report on all their assets and liabilities and are not required to record provisions of long service leave and annual leave so make sure you fully assess all liabilities.
  3. Familiarise yourself with the tax obligations of the entity to be purchased. Are all PAYGW, FBT, Super, GST and payroll tax obligations being met?Take Care:Consideration must be given to the duties of a director under the tax law. New directors need to take action within 30 days of their appointment where the company has outstanding pay-as-you-go (PAYG) withholding or superannuation contribution amounts, or face the possibility of becoming personally liable to pay a director penalty.
  4. Identify all the fixed assets being sold and ensure you get the following information:
    • A Fixed Asset register detailing the following information about the assets:
      • the original purchase price;
      • the purchase date;
      • the depreciation method used;
      • the depreciation rate used;
      • the effective life of the asset; and
      • the written-down value.
    • Ownership and condition of the assets being sold and copies of instruction manuals
    • Where assets are leased by the business, obtain copies of the leases.
      • TIP: If you are taking over the existing leases, consideration should be given to whether the leasing terms are reasonable.
  5. Check all the Insurance Policies and ensure all assets are adequately insured until settlement of the purchase.
  6. If the business has carry forward losses check with your accountant on whether you will be able to utilise these losses.  The ATO has strict criteria in relation to the ability of an entity to deduct carry forward losses and this varies depending on whether the entity is a company or a trust.
  7. Check everything in relation to Employees!
    • Obtain a list of the employees, including their salaries and other entitlements.
    • Consider if any employees have close contacts with customers and the risk that if they were to leave, would the business be at risk of losing customers?
    • Identify any key staff who would be imperative to the smooth continued running of the business.
    • Check all contractual and award employment conditions, including key workplace agreements, incentive bonus plans, staff rotation policies and  disciplinary procedures.
    • Check the employees are legally employed and receiving award conditions
      • Take Care: The Fair Work Ombudsman (FWO) has been investigating 7-Eleven for underpaying of wages and doctoring payroll records.  Franchisees are ultimately responsible for their employees.
    • 20 stores were raided in September 2014 and 60 per cent were found to be underpaying staff and doctoring their payroll.
    • Ensure WorkCover premiums up-to-date
      • Take Care: Where a business is sold through an asset sale, the purchaser can choose not to take on the employees of the vendor. However, where a business is sold through the sale of units or shares, there will be a continuity of employment and the buyer is responsible for any employee liabilities accrued.
  8. Review Trading stock records for obsolete stock and check market value of the stock.
    • TIP: Where the purchase of the business includes trading stock, the trading stock must be valued at market value on the day of disposal, which is normally the date of the purchase contract. 
  9. Sight copies of all real estate agreements, deeds, mortgages and any documents relevant to the business premises.
    • Ensure adequacy of lease terms for the business premises and the vendor has  facilitated a lease assignment and all documents been signed by you.
  10. Find out why the vendor is selling and if the vendor has attempted to sell the business before. If so, what happened? Could any of the following inhibit a successful succession plan: Competitors, ongoing lawsuits,  any recently finalised litigation cases, any council plans or council orders that could disrupt the business or lead to a potential drop in sales, any key customer and supplier contracts, or issues relating to trademarks, licences or  patents. 

This is not an exhaustive Due Diligence Checklist, but tick these boxes and you may very well be a new business owner of a great business.

Amanda Rogers, Associate Director, WLM Financial Services